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Encana (ECA) to Report Q1 Earnings: What's in the Cards?

Oil and gas explorer Encana Corporation ECA is set to report first-quarter 2016 results on Tuesday, May 3, before the market opens.  

Coming to its earnings surprise history, Encana reported an average positive earnings surprise of 30.16% for the last four quarters. Let’s see how things are shaping up for this announcement.  

Factors to Consider This Quarter

Calgary, Alberta-based Encana is a focused pure-play natural gas exploration and production (E&P) company.  It is one of the largest natural gas companies in North America with the potential for robust growth in production owing to its huge inventory of reserves and a strong resource base.

Encana has been working toward reducing expenses by selling high cost to low profit generating assets. The divestiture of several such assets as part of the company’s portfolio streamlining strategy should bode well.

The proceeds are being used to lower debt burden though much is yet to be achieved. This offers financial flexibility to the company to better handle the current volatile market condition. Also, Encana remains focused on expanding its asset base to generate higher returns. Initiatives like these should have a positive impact on the upcoming earnings.

However, the company’s financials are heavily exposed to commodity prices. During the January-March period crude traded below $40 per barrel. Most importantly, the West Texas Intermediate (WTI) crude fell to the 12-year low mark in mid February. On top of that, natural gas has not fared well as reflected by gas pricing fundamentals that were weaker than the prior-year quarter. This in turn is likely to result in lower revenues for the firm.

Encana is also facing tough competition from producers of renewable sources of energy. With customers increasingly opting for environmentally friendly renewable energy resources, the company’s profits are being affected by the stiff competition.

Other concerns for the firm include rising costs and a highly leveraged balance sheet.

Earnings Whispers

Our proven model does not conclusively show that Encana is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: Encana's Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%.

Zacks Rank: Encana has a Zacks Rank #3, which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

The Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions. 

Stocks That Warrant a Look

Here are some companies from the energy sector with the right combination of elements to post an earnings beat this quarter:

Enable Midstream Partners, LP ENBL with an Earnings ESP of +21.05% and a Zacks Rank #2 (Buy).

Bill Barrett Corp. BBG with an Earnings ESP of + 9.09% and a Zacks Rank #2.  

Spectra Energy Partners LP SEP has an Earnings ESP of + 2.27% and a Zacks Rank #2.

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